Prices Rise Only Slightly, Easing Fears About Inflation

By EDMUND L. ANDREWS

Published: February 24, 2005

Consumer prices barely rose in January, the government said on Wednesday, but the Federal Reserve signaled its intention to keep nudging up interest rates in the months ahead.

Consumer prices edged up 0.1 percent in January, adjusted for seasonal factors, after being flat in December. The mild increase soothed investor anxieties about inflation, even though it stemmed in part from a temporary dip in oil prices that has since reversed.

The consumer prices report came as newly released minutes from the Federal Reserve's policy meeting on Feb. 1 and 2 suggested that Fed officials were slightly less worried about inflation than they had sounded in January.

The minutes suggested that Fed officials would continue to slowly raise short-term interest rates, but there were fewer hints about the need to speed the process of rate increases in response to inflationary pressure.

The minutes were conspicuously silent about whether the Fed should continue to announce its intention to raise rates at a ''measured'' pace, a code phrase generally assumed to mean quarter-point increases at every policy meeting until at least this summer.

But analysts said Fed officials had differing views about what is ahead. At least some officials are worried about inflationary pressures caused by the dollar's falling value, slowing productivity growth and rising wage costs.

Jack Guynn, president of the Federal Reserve Bank of Atlanta, told executives in Alabama on Wednesday that the central bank ''still has a ways to go in recalibrating monetary policy'' -- a pointed warning that the Fed was not finished with its rate increases.

At the February policy meeting, Fed officials voiced some of the same concerns as they had in January about the falling dollar; the record trade deficit, which topped $600 billion in 2004; and a federal budget deficit that is on track to hit $427 billion this year.

But the tone of the new Fed minutes was much more muted than it was in January, omitting previous expressions of concern about ''excess speculation'' in real estate as well as in financial markets.

''Participants thought that the rate of core inflation likely would remain low and stable, assuming further removal of policy accommodation,'' the Fed said in its summary of the meeting, referring to its strategy of gradually raising interest rates from the lows reached in 2003 and 2004.

In previous months, the minutes have noted that some policy makers wanted to abandon the implied commitment of raising rates at a ''measured pace,'' arguing that the central bank needed more flexibility.

The Fed chairman, Alan Greenspan, conspicuously avoided using the phrase in two days of testimony in Congress last week, saying only that interest rates are still ''fairly low.''

The new minutes say that ''all members agreed'' to keep the language about a ''measured'' pace, but they also emphasized that ''the committee would respond to changes in economic prospects as needed to maintain price stability.''

''The committee might be on the verge of moving to language that is more flexible,'' said Laurence H. Meyer, a former Fed governor and now a senior economist at Macroeconomic Advisers, a forecasting firm.

But it remains unclear whether a more flexible approach would mean a slowdown or an acceleration of rate increases. Though some officials are clearly worried about inflation, others are aware that each additional rate increase brings interest rates closer to a ''neutral'' level that neither juices up the economy nor slows it down.

The consumer price data released on Wednesday suggested that inflation remains low.

Seasonally adjusted, the overall consumer price index rose 0.1 percent January. In the last three months, consumer prices rose at an annual rate of 1.3 percent, considerably slower than they had been rising last spring and summer.

The ''core'' rate of inflation, excluding the volatile prices for food and energy, climbed 0.2 percent on a seasonally adjusted basis.

But the biggest source of inflation relief was temporary: Energy prices fell 1.1 percent in January and at an annual rate of 6 percent over the previous three months.

Those price declines are likely to reverse, at least in part, because oil prices have jumped back up above $50 a barrel in recent days.

Economists continue to worry about producer prices, the prices charged by wholesalers. Last Friday, the government reported that producer prices, outside of food and energy, jumped 0.8 percent in January, the biggest increase in six years.